The U.S. Senate Judiciary Committee Tuesday put Napster in the hot seat with questions about its business model and how the company plans to make money, as the U.S. Congress made one of its first forays into the controversy over downloadable music available on the Internet.
The hearing featured testimony not only from Napster's Interim CEO Hank Barry, but also from Lars Ulrich, co-founder of rock band Metallica, which has sued Napster over alleged copyright violations. Several U.S. senators appeared skeptical about whether Napster is entirely within the bounds of U.S. copyright law.
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But the U.S. lawmakers mostly stayed clear of the rhetoric that Web music services like Napster have generated, recommending the parties work out a settlement themselves. The senators showed little inclination toward writing new laws, at least for now.
Napster and other Web sites where music can be downloaded for free or for a small fee have roiled the music industry in recent months because they circumvent the established chain of music distribution. In addition to cutting out all the middlemen and production employees along the distribution chain, the sites also threaten the compensation paid to the artist.
Ulrich, with the lawsuit Metallica filed in April, was one of the first musicians to put his foot down. He told the committee that Napster hijacked Metallica's music - they never asked permission.
"We certainly understand this is the future, we have no problem with the Internet, it's just on whose conditions," Ulrich said. "We believe that as the artists, we have the right to control what happens to our music, and that choice is clearly taken away from us."
But Barry, repeating often stated defenses, said Napster is completely innocent of violating any copyrights and "simply facilitates communications between people interested in music" by giving them the ability to "sample and preview" music before buying it. The company is helping, not hurting the music industry, he said.
"Napster users buy more records as a result of using Napster, and sampling music before buying is the most important reason people use Napster," Barry said. "In the last six months, record sales are up more than 8% over the previous year. That's $1 billion a year."
Barry said Napster does not copy files and does not make or transfer MP3 files. The company provides users with a free index of music files available from the users logged on to the Napster site at a given time and lets them reach into each others' hard drive and "share" the files under legally acceptable "fair use" terms. The fair use logic runs that if someone owns a music file, they are allowed to make a copy for a friend or store it on their hard drive as long as their actions aren't motivated by profit.
However, some of the U.S. senators showed signs that they are irritated by the fact that musicians and the recording industry ultimately don't receive any payment for their labors from people who get to enjoy their music by tapping into the files that Napster makes available.
"I love the innovation that is coming in this digital world," said Senator Patrick Leahy (D-Vt.) and ranking minority member of the Senate Judiciary Committee. "But we are not going to have artists [offering their works], unless there is some gain to them."
Leahy also urged the recording industry, musicians, Napster and the other music Web sites to continue negotiating to work out a settlement, otherwise there will be pressure on Congress to start drafting legislation covering such issues as compulsory licenses and even a single fee for the writers, performers and record companies.
"Think about that," he said. "Frankly, I'm not sure any one is going to be happy if we did do that."
Senator Dianne Feinstein (D-Calif.) was the sharpest inquisitor among the four senators that questioned Barry. She criticized the method Napster uses as one that can defeat any copyright under a "cloak of anonymity" because users do not have to register or pay royalties.
But Barry maintained that Napster's 20 million users are not committing copyright infringement and are not liable for copyrights and neither is Napster.
"I beg your pardon, but why are you not liable if you make it possible to convey a copyright infringement when you could instead of allowing anonymity?" Feinstein asked. "You could, in fact, as others have done, have the individual's name and address and they would pay a fee and the copyright fee would be paid, but you've chosen not to do that."
Barry declined to answer further, saying the senator's questions "go to the heart of the litigation" in which Napster is currently involved.
"I suggest that these arguments have been made previously with respect to every technological advancement," Barry said. "The terrible things that have been prophesied have not come true."
Feinstein also asked Barry to comment about an estimate that up to 87% of the materials found on Napster are copyrighted, but Barry said he didn't know what the actual percentage is.
Feinstein and Leahy also probed Barry about Napster's business model and how the company planned to make money. Leahy noted that Napster has just received a $15 million investment from the venture capital company for which Barry works.
Barry indicated that Napster is in the process of working out a business plan under which the Napster music index and chat rooms will provide sources of revenue.
"We are facilitating [the index and chat], and, at some point in the future, I believe we will be able to derive some revenue from there," Barry said. "I have to believe we can make some money for making it convenient."
Senator Orrin Hatch (R-Utah) and the chairman of the committee, asked whether the payment problem could be solved if Napster were equipped with accounting software that would keep track of royalties owed, or with access control software to ensure payment for music.
Barry said he believed Napster already does that because users ultimately go to a record store and buy the songs they sample, but he added, "Do we want to work out a private arrangement whereby something could be done along the lines you describe? The answer is yes."
Such a system is possible technologically, but although extraordinarily difficult, it probably would be worth the effort, Barry said.
Gene Kan, who helped develop Gnutella, and who also testified before the committee, agreed that integrating accounting and access software would be possible, though difficult. Gnutella functions like Napster, but does not involve a central server.
Metallica was joined by the Recording Industry Association of America in the suit against Napster, which charges Napster with committing continuing copyright infringements, unlawful use of the digital audio interface device and violations of the Racketeering Influenced & Corrupt Organizations Act.
In addition to Metallica's lawsuit, MP3.com has had to fend off legal challenges. But last month the company reached settlement agreements over copyright-infringement suits filed by music industry giants Warner Brothers Music Group and BMG Entertainment.
MP3.com, whose Chairman and CEO Michael Robertson also testified at the hearing, differs from Napster in that the company lets users download music they already own to various digital devices.
Robertson urged the committee to consider legislation that would clarify the U.S. copyright law so that every time a new device comes out, "we don't go through the same issue of does the consumer have the right to listen to the music that they have legally purchased on a new device," he said.
But Metallica's Ulrich was much more straightforward about asking the committee to take action. Comparing Napster users to thieves, he said he believes there's a need for legislation.
"I think we're dreaming if we think we can work this out between us," Ulrich said.
MP3.com, based in San Diego, can be found at www.MP3.com/. Napster, based in San Mateo, Calif., is at www.napster.com/.
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